HILSENRATH’S TAKE
The forward guidance that central bankers provide on their plans for short-term interest rates is turning into an increasing muddle.

Since December 2012, the Federal Reserve has said it wouldn’t consider short-term interest rate hikes until the jobless rate falls to 6.5% and unless inflation looks to be moving above 2.5%. Last year the Bank of England said it wouldn’t lift rates at least until the jobless rate fell to 7%.

Now as jobless rates in both countries approach their respective thresholds much faster than expected, central bankers are playing down the importance of these hard-and-fast numbers.

“It’s really about overall conditions in the labor market, overall amount of slack in companies…we wouldn’t want to detract from that focus, which really is properly developed both in the market and amongst business people, by unnecessarily focussing too much on just one indicator,” Bank of England Governor Mark Carney said in an interview with the BBC Thursday, downplaying the 7% threshold.

The Fed, too, has tiptoed away from its unemployment threshold. In December, the Fed said in its policy statement rates would stay near zero “well past” the time that the U.S. jobless rate hits 6.5%.

Like Mr. Carney, Fed chairman Ben Bernanke has sought to broaden the Fed’s focus as the jobless rate drops. The Fed’s future decisions about rates will depend on other factors, such as labor force participation rates, he has said.

The central banks have always left themselves wiggle room, saying that crossing the thresholds wouldn’t automatically trigger rate hikes. They have developed growing doubts about whether jobless rates are telling the whole story about labor market conditions. For example, the job market might be hiding inflation-reducing slack even as unemployment falls because people are temporarily leaving the labor force and reducing official counts of the unemployed.

Still, at some point investors might come to wonder whether the central banks, by looking past declining unemployment rates, are simply setting themselves up for the classic mistake of waiting too long to pull the punchbowl away from the party.

Forward guidance is a novelty in central banking. But the debates inside the Fed and Bank of England about how to manage it have all the makings of an age-old central banking dilemma.

-By Jon Hilsenrath

MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLDCentral Banks Intervene As Emerging Currencies Get Battered. Investors unloaded emerging-market currencies after weak economic data from China heightened worries about the developing world’s ability to weather the end of easy-money policies. The Argentinian peso tumbled more than 15% against the dollar in early trading as the South American nation’s central bank stepped back from its efforts to protect the currency, forcing the bank to reverse course to stem the slide. The Turkish lira sank to a record low against the dollar for a ninth straight day. The Russian ruble and South African rand hit multiyear lows. http://on.wsj.com/1bkLhTv

BOE’s Carney Signals Rethink On Forward Guidance. Bank of England Gov. Mark Carney on Friday said the U.K. central bank will update its interest-rate guidance when it publishes new forecasts for growth and inflation in mid-February, following a faster-than-expected fall in unemployment. In a speech at the World Economic Forum in Davos, Switzerland, he said the rate-setting Monetary Policy Committee will consider “a range of options” to “evolve” its forward guidance strategy. http://on.wsj.com/1fboT3E

Central Banks Phasing Out Dollar Funding. The European Central Bank said Friday that it and other major central banks are gradually withdrawing a crisis-era measure that ensured a steady supply of U.S. dollar funding to European and Asian banks. http://on.wsj.com/1dAE3KX

Central Banker Talks Aussie Dollar Down. The currency fell to a fresh 3½-year low Friday after an influential member of the board of the Reserve Bank of Australia said the currency needed to fall further. http://on.wsj.com/1hqL7hv The central bank’s interest-rate setting board convenes on Feb. 4, with no expectation it will adjust its benchmark cash rate from the current record low of 2.50%. A survey of 17 economists by The Wall Street Journal showed two expect further cuts, seven expect no change through the year, and eight expect the RBA to have started raising interest rates by the end of the year. http://on.wsj.com/1eWY8h6

China Moves to Avert Shadow Lender’s Default. A coal company facing repayment of a three billion yuan ($500 million) loan has received government permission to restart one of its mines as creditors and officials scramble to avoid a default that could batter confidence in China’s loosely regulated shadow-banking sector. http://on.wsj.com/1ehf8gv

South Korean Central Bank Concerned About Yen’s Devaluation. In an interview with the Wall Street Journal on Thursday, Kim Choongsoo said any further depreciation of the Japanese yen would cause widespread pain to South Korean exporters, but he ruled out a competitive devaluation of the won as a response.He also cautioned that any negative effects on emerging economies from the U.S. Federal Reserve’s decision to reduce its monthly bond purchases could boomerang on the U.S. economy. http://on.wsj.com/1egVQYs

FORWARD GUIDANCEFriday: European Central Bank President Mario Draghi speaks at Davos on “The Path from Crisis to Stability” at 12:00 pm EST.

Bank of Japan Gov. Haruhiko Kuroda and Brazil’s central bank chief Alexandre Tombini participate in a session titled “The Future of Monetary Policy,” along with former U.S. Treasury chief Lawrence Summers and U.K. Chancellor of the Exchequer George Osborne, according to the WEF schedule.

GRAPHIC CONTENT
Fed officials decided at their meeting last month to start winding down, or “tapering,” their bond-buying program, reducing their monthly purchases to $75 billion from $85 billion. Those who’ve spoken on policy since mid-December suggest something similar is in store at their Jan. 28-29 FOMC meeting. Several have suggested in public remarks and interviews that they’d support another $10 billion cut in their bond purchases, to a $65 billion per month. Here’s what they’ve said: http://on.wsj.com/1g5smnc

BASIS POINTS
- Swiss National Bank President Thomas Jordan said the central bank’s decision to further tighten capital rules for mortgage lenders was necessary in order to calm the Swiss property market, the Tages-Anzeiger reports.-

- Bids submitted at today’s 10-year inflation-protected TIPS sale were only enough to cover the $15B offering 2.31 times, the lowest since April 2009– Dow Jones

- Yields on southern European bonds, which have been rallying recently, fell victim to the broad selloff in emerging markets.– Dow Jones

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